On both sides of the Tasman, two reports have been released in quick succession. The reports will undoubtedly have important implications for general insurers.
In Australia, the Royal Commission into the banking and financial services industry has handed down its much-awaited – and, by some, feared – report. The report is fiercely critical of some of the practices employed by the insurance and banking industries, including (significantly) the payment of commissions to brokers by the banks. The Royal Commission recommends that the borrower alone pay for a broker’s services. How this will be received by consumer groups, given the potential to increase the cost of those services, and whether it is a realistic proposal, remains to be seen. But the underlying message is clear: the Royal Commission considers a commission arrangement between broker and lender to give rise to a conflict of interest.
Other recommendations by the Royal Commission include amending the law on non-disclosure and avoidance. It recommends that the insured’s duty of disclosure be one based on reasonable care – in summary, that the insured must exercise reasonable care to not misrepresent or fail to disclose material matters. It also recommends that the right of avoidance for non-disclosure be available only where the insurer establishes that it would not have insured the risk at all. Such a change to the law makes much sense from a policy perspective.
In New Zealand, a combined report by the Financial Markets Authority (FMA) and the Reserve Bank of New Zealand (RBNZ) examines the culture and conduct of the life insurance industry. But the regulators clearly have a broader audience in mind, specifically stating: “We expect all insurers to assess their conduct and culture governance frameworks, and consider and act on all relevant recommendations in this report”.
The report identifies that there is no overarching regulation for the entire lifecycle of an insurance policy. It notes the FMA, RBNZ and Commerce Commission all separately regulate various aspects of the insurance sector. Further, the FMA and RBNZ are clearly not altogether happy with the industry’s internal regulation, as reflected in the Fair Insurance Code.
Crucially, as with the Royal Commission in Australia, the regulators in New Zealand found there was a lack of oversight of third-party intermediaries selling the insurance company’s product. A focus of the report is the role that volume- and value-based incentives play in the industry. Sales incentives are seen as promoting profit over consumer outcomes. These incentives are also seen to be creating conflicts for salespeople, changing the priority from providing the consumer with an appropriate outcome to a focus on making commissions and hitting sales targets.
An example identified in the report is the practice of ‘churning’. This practice was earlier identified in the Ministry of Business, Innovation and Employment’s proposals regarding insurance contract reform and involves reselling policies to customers in order to collect commissions and ‘pad out’ sales. This extended to commission structures for intermediaries, with the report recommending that incentivisation should be based on positive customer outcomes rather than quantitative measures such as volume and value of sales. The report gives until 31 December 2019 for the removal of sales-based incentives.
The government is quickly reinforcing the recommendations around incentive programmes from insurance sectors. Commerce and Consumer Affairs Minister, Kris Faafoi, has announced that Cabinet plans to fast-track consumer protection measures. This will include a consultation paper on changes in May and legislation in parliament by mid 2020.
Some insurers pointed to the upcoming Financial Services Legislation Amendment Bill, stating that the need for all financial advice providers to be licensed removed the need for them to monitor intermediaries. The report notes that this increased regulation would still not discharge the insurer’s responsibility for customer outcomes. This suggests regulators are looking for proactive steps beyond the legislative minimum requirements in order to meet their standards.
The report particularly criticises the governance practices of the industry. It was seen that Boards were not taking enough responsibly to set a constructive tone from the top. This feeds into the regulators’ concern with overall industry culture and conduct. The report recommends that more should be done to create and maintain clear culture and conduct expectations that are understood by all staff. This is linked to inadequate training and internal reporting. Insurers are called to create clear internal conduct policies, processes and training to deal with conduct and culture breaches, as well as for dealing with vulnerable customers.
The report gives concrete deadlines for the industry to respond to the findings. By 30 June 2019, each insurer is required to develop an action plan addressing the recommendations in the report and explain to the FMA and RBNZ how they will meet expectations regarding staff incentives and intermediaries commission. The FMA and RBNZ plan to release a report of these findings. Life insurers are requested to make actual changes to their sales incentive schemes before 31 December 2019.
Comment from Philippa Fee
Philippa Fee comments that “the issue of these highly critical reports signals to the insurance industry a period of increased regulatory scrutiny is well and truly underway, particularly in relation to the relationship between brokers and insurers. Insurers would be well-advised to carefully review their intermediary relationships to ensure that the financial arrangements are ethical, board governance is sound, and that policies and processes maintain a positive consumer-focused culture.”